Local steel processing and servicing firm Kawarin Enterprises has, in one respect, reaped the benefits of a strong and appreciating Singapore dollar.

“It’s good for us when we are buying machinery or raw materials, to have the Singapore dollar relatively strong compared to other currencies,” said its managing director Ken Lin.

However, while these expenses may be cheaper, things are less rosy when it comes to exporting the firm’s goods as a stronger Singapore dollar generally makes the firm’s exports more expensive for buyers.

Yesterday (October 14), the Monetary Authority of Singapore (MAS) used technical tools at its disposal to tighten monetary policy, which has the effect, broadly speaking, of allowing the Singapore dollar to appreciate relative to other currencies.

The reason for the move is to combat rising inflation, a scourge across most of the world, by making imports relatively cheaper.

Many central banks raise interest rates to achieve the same goal. MAS tightens monetary policy by managing the Singapore dollar against a basket of the currencies of its main trading partners.

And for Lin, the inflationary problem and the generally grim state of the global economy present plenty of challenges.

“It’s really the overall business environment. It might be interest rates, or geopolitical factors like the war in Europe,” said Lin.

Economists interviewed by TODAY following MAS’ latest monetary policy announcement said that many businesses here face the same double-edged sword as Kawarin.

While MAS’ move to give more head room for the Singapore dollar to appreciate can cushion imported inflationary pressures, it might do little to help businesses that are facing major external headwinds, said some economists.

On the other hand, the manufacturing federation here hopes for a normalisation of monetary policy in the future to boost demand, particularly in the regional markets that have weaker currencies compared to Singapore.

The move on Friday was the fifth time MAS has tightened its monetary policy since October 2021 — including during two off-cycle adjustments in January and July.

Good for households, not necessarily for business

Barnabas Gan, Singapore-based senior economist at Malaysia’s RHB bank, said that as Singapore imports many of its goods, the uptick in consumer prices in the country is very much driven by global prices.

“If there hasn’t been any form of tightening by the MAS, we could likely see inflation rising much faster than what we are seeing right now,” he said, referring to past tightening moves by the central bank.

On what the tightening of monetary policy would mean for businesses, Gan said: “It basically means that policymakers are cognisant about inflation risks and they are doing what they can to achieve stable prices.”

Economists said that households generally would benefit from the tightening of the policy.

“It’s really about containing imported inflation as much as possible, especially on basic things such as food, because that’s obviously very important for everyone,” said CIMB economist Song Seng Wun.

Agreeing, Selena Ling, chief economist at OCBC, said that the impact is “more straightforward” for households, which can benefit from cheaper imported goods, as long as the job market holds up.

While the cheaper imports may also lower costs for materials and inputs for businesses, the impact might be more nuanced.

The “different idiosyncrasies and structures” across businesses make it difficult to paint the impact on businesses with a “broad brush”, according to Standard Chartered’s chief economist for Asean and South Asia, Edward Lee, and the bank’s economist for Asia, Jonathan Koh.

“The other angle to think about as well is that a stronger Singapore dollar may result in lower domestic (and not just external) demand for domestically produced goods as imports become more competitive,” said Lee and Koh.

Currency not sole demand determinant for Sg-made goods

By and large, companies which chose to set up shop here would likely not be too bothered by the continued appreciation of the Singapore currency, economists opined.

“If you want to do manufacturing in Singapore, you already know what are the constraints — people, costs and a strong Singapore dollar,” said Song.

Hence he said, most of the exporting businesses here are not those that are competing on prices, he added.

“Singapore manufactures high value-added exports and demand for these exports could be less price sensitive,” said Lee and Koh of Standard Chartered.

Economists point to bigger concerns that will continue to impact demand for exports.

For example, Ling said geopolitical flashpoints such as the Russia-Ukraine war and US-China spat over semiconductors and trade have contributed to supply-side disruptions. MAS tightening monetary policy has little impact on those, she said.

Aside from geopolitical factors and softening global demand, labour costs, prices of related goods and services may also impact business margins, said Song.

The regional disadvantage

The economists at Standard Chartered also highlighted potential impacts on other businesses, such as tourism.

“With a stronger Singapore dollar, it becomes more expensive for inbound tourists to visit Singapore,” said Lee and Koh, adding that it would at the same time incentivise locals to go on overseas holidays, thereby reducing consumption domestically.

They also opined that the impact of Singapore’s currency on its export economy cannot be entirely dismissed either.

“There is reason to still be cautious about the Singapore dollar’s impact on export competitiveness, especially since it was alluded to by Prime Minister Lee Hsien Loong during his National Day Rally and recently by (Trade and Industry) Minister Gan (Kim Yong),” said Mr Lee and Mr Koh of Standard Chartered.

Agreeing, Ling of OCBC said: “The Singapore dollar has weakened against the US dollar, but strengthened against many regional currencies. So it depends on where the exporters are exporting to.”

Lennon Tan, president of the Singapore Manufacturing Federation, said that a stronger Singapore currency helps lower costs of imports, but it makes exports less competitive in regional markets.

“Regional offices may also report smaller profit due to exchange losses because of the strong Singapore dollar,” he said.

“With manufacturing output growth slowing down for the past consecutive months, we therefore hope that when inflation is under control, the monetary policy will be adjusted to a normalised level to boost demand and export for our manufacturers.”